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Retail inflation rises to two-year high on costly food, hits rate cut hopes
NEW DELHI: Consumer price index-based inflation accelerated to a near two-year high of 5.76% in May, driven by surging prices of food products such as pulses and
NEW DELHI: Consumer price index-based inflation accelerated to a near two-year high of 5.76% in May, driven by surging prices of food products such as pulses and sugar, which could dampen hopes of a rate cut at least during the next monetary policy review in August.
After leaving rates unchanged last week, Reserve Bank of India governor Raghuram Rajan said the Reserve Bank of India (RBI), which has targeted inflation at 5% by March 2017, was looking for room to reduce interest rates, but there were concerns over upward pressure on food and commodity prices.
Food inflation picked up to 7.55% in May from an upwardly revised 6.40% in the previous month, as prices of vegetables, sugar and pulses rose between 11% and 32% from a year ago.
Retail inflation has more than halved since November 2013, due to a crash in global commodity prices as well as subdued rural demand. It had hit 7.03% in August 2014.
RBI deputy governor SS Mundra said on Monday the central bank will continue to monitor data and slash rates only if there is a decline in the number.
“...All the data points will be taken into account. If any room develops, then there would be room for the accommodative monetary policy to continue,” Mundra told reporters.
Analysts fear an increase in the cost of petrol and diesel by more than 5% since May 1, and food items such as sugar and milk in the last month, could further heat up prices.
“While there are some seasonal factors at play, structural mismatches are also evident in the rise in protein inflation,” said A Prasanna, economist at ICICI Securities Primary Dealership. “We stick to our call of no more rate cuts in this financial year.”
The government recently hiked taxes by 0.5 percentage point on services, including telecom, travel and eating out, from June 1.
Monday’s data comes on the heels of a 0.8% contraction in industrial production in April.
Asia’s third-largest economy grew 7.9% in the quarter to March, outpacing China’s 6.7% growth, and is projected to expand by around 7.75% in the current fiscal year that started on April 1.
The monsoon, which delivers 70% of annual rainfall, is critical for India’s 263 million farmers and their crops, such as rice, cane, corn and cotton because nearly half of farmland lacks irrigation.
